Digital Transformation Strategy

1 Digital Transformation Strategy Promoting sound progress for the benefit of the European Union economy , its citizens and businesses EIOPA(2021)0060407 10 December 2021 Digital Transformation Strategy Promoting sound progress for the benefit of the European Union economy , its citizens and businesses Page 2/21 1. INTRODUCTION Digital Transformation is generating a wave of change across economic and financial sectors, affecting the society at large. This Transformation has many aspects. Consumers increasingly demand products and services to be available from a single access point through their smart phones or computers, on a 24/7 basis and from any location. In addition, the processing of new datasets, such as those arising from the Internet of Things (IoT), by increasingly accurate and granular Artificial Intelligence (AI) systems offers the opportunity to develop more efficient, timely and automated processes. Digitally native InsurTech start-ups and broader technology companies (including the so-called BigTech companies) are entering financial markets with novel offerings, while incumbents are transforming their value chains.

2 Certainly, the pace and breadth of activity raises major challenges which supervisory authorities need to take into account justifying a reflection on how to respond to changes which can otherwise seem difficult to manage. In recent years EIOPA has undertaken horizon scanning, publishing consultation papers, reports, and regulatory guidance on topics such as AI, cloud computing, open insurance, Blockchain or licensing requirements in an InsurTech context. EIOPA has also organised several InsurTech roundtables and created a dedicated stakeholder expert group on Digital ethics to discuss these topics from a broader perspective. In parallel to these activities, the European Commission has also recently launched an ambitious Digital agenda ( Digital Finance Strategy , Data Strategy , Retail Investment Strategy , Artificial Intelligence Act, Digital Markets Act, etc.) seeking to update the legislative framework to the Digital age. The objective of the present Strategy is not to overlap EIOPA s normal work planning process, but rather to set out how EIOPA, with its European perspective, can contribute best to the a sound Transformation of the EU insurance and pensions markets and their supervision, how EIOPA can approach the prioritisation of its work on Digital Transformation topics, and how EIOPA can best add value for its Members (National Competent Authorities (hereinafter NCAs)).

3 EIOPA aims to achieve these objectives having regard of its given mandate and following the principle of technological neutrality and maintaining a level playing field. The Strategy sets out what EIOPA stands for in this time of change. Digital Transformation Strategy Promoting sound progress for the benefit of the European Union economy , its citizens and businesses Page 3/21 2. EIOPA S Digital Transformation STRATEGIC PRIORITIES AND OBJECTIVES EIOPA s supervisory and regulatory activities are always underpinned by two overarching objectives: promoting consumer protection and financial stability. The Digital Transformation Strategy aims at identifying areas where, in view of these overarching objectives, EIOPA can best commit its resources in view of the challenges posed by digitalisation, while at the same time seeking to identify and remove undue barriers that limit the benefits. This Strategy sits alongside EIOPA s other forward thinking prioritisation tools the union-wide strategic supervisory priorities,1 the Strategy on Cyber Underwriting, 2 the Suptech Strategy3 but its focus is less on the specific actions needed in different areas, and more on how EIOPA will support NCAs and the pensions and insurance sectors in facing Digital transformations following a technologically-neutral, future-proof, ethical and secure approach to financial innovation and digitalisation.

4 Five key long-term priorities have been identified, which will guide EIOPA s contributions on digitalisation topics: 1. Leveraging on the development of a sound European data ecosystem 2. Preparing for an increase of Artificial Intelligence while focusing on financial inclusion 3. Ensuring a forward looking approach to financial stability and resilience 4. Realising the benefits of the European single market 5. Enhancing the supervisory capabilities of EIOPA and NCAs. These five long-term priorities are described in the following sections. Each relates to areas where work is already underway or planned, whether at national or European level, by EIOPA or other European bodies. 1 EIOPA, Union-wide strategic supervisory priorities, January 2021, 2 EIOPA, Strategy on Cyber Underwriting, February 2020, 3 EOPA, Supervisory Technology Strategy , February 2020, Digital Transformation Strategy Promoting sound progress for the benefit of the European Union economy , its citizens and businesses Page 4/21 The aim is to focus on priority areas where EIOPA can add value so as to enhance synergies and improve overall convergence and efficiency in our response as a supervisory community to the Digital Transformation .

5 LEVERAGING ON THE DEVELOPMENT OF A SOUND EUROPEAN DATA ECO-SYSTEM ACCOMPANYING THE DEVELOPMENT OF AN OPEN FINANCE AND OPEN INSURANCE FRAMEWORK Trends in the market show that the exchange of both personal and non-personal data through Application Programming Interfaces (APIs) is a leading factor leading to Transformation and integration in the financial sector. By enabling several stakeholders to plug to an API to have access to timely and standardised data, insurance undertakings in collaboration with other service Digital Transformation Strategy Promoting sound progress for the benefit of the European Union economy , its citizens and businesses Page 5/21 providers can timely and adequately assess the needs of consumers and develop innovative and convenient proposals for them. Indeed, there are multiple types of use cases that can be developed as a result of enhanced accessing and sharing of data in insurance. Examples of potential use cases include pension tracking systems (see further below), public and private comparison websites, or different forms of embedding insurance (including micro insurances) in the channels of other actors (retailers, airlines, car sharing applications, etc.)

6 Another use case could consist in allowing consumers to conveniently access information about their insurance products from different providers in an integrated platform / application and identify any protection gaps (or overlaps) in coverage that they may have. In addition to having access to a greater variety of products and services and enabling consumers to make more informed decisions, the transfer of insurance-related data seamlessly from one provider to another in real-time (data portability) could facilitate switching and enhance competition in the market. Supervisory authorities could also potentially connect into the relevant APIs to access anonymised market data so as to develop more pre-emptive and evidence-based supervision and regulation. However, it is also important to take into account relevant risks such those linked to data quality, breaches and misuse. ICT/cyber risks and financial inclusion risks are also relevant, as well as issues related to a level playing field and data EIOPA considers that, if the risks are handled right, several open insurance use cases can have significant benefits for consumers, for the sector and its supervision and will use the findings of its recent public consultation5 on this topic to collaborate with the European Commission on the development of the financial data space and/or open finance initiatives respectively foreseen in the Commission s Data Strategy6 and Digital Finance Strategy , 7 possibly focusing on specific use cases.

7 4 The potential entry of new market players into the area of financial services has triggered concerns as to whether existing financial service providers may be faced with unfair competition due to the data sharing requirements imposed on them and a lack of reciprocity to respect this principle in other sector. 5 EIOPA, Discussion paper on Open Insurance: Accessing and Sharing insurance-related data, 2021, 6 European Commission COM/2020/66 (2020). A European Strategy for data. 7 European Commission COM(2020) 591 (2020). Digital Finance Strategy for the EU. :52020DC0591&from=EN Digital Transformation Strategy Promoting sound progress for the benefit of the European Union economy , its citizens and businesses Page 6/21 ADVISING ON THE DEVELOPMENT OF PENSIONS DATA TRACKING SYSTEMS IN THE EU European public pension systems are facing the dual challenge of remaining financially sustainable in an aging society and being able to provide Europeans with an adequate income in retirement.

8 Hence,the relevance of supplementary occupational and personal pension systems is increasing. The latter are also seeing a major trend influenced by the low interest environment consisting on the shift from Defined Benefit (DB) plans, which guarantee citizens a certain income after retirement, to Defined Contribution (DC) plans, where retirement income depends on how the accumulated contributions have been invested. As a consequence of these developments, more responsibility and financial risks are placed on individual citizens for planning for their income after retirement. In this context, Pensions Tracking Systems (PTS) can provide simple and understandable information to the average citizen about his or her pension savings in an aggregated manner, typically conveniently accessible via Digital channels. PTS are linked to the concept of Open Finance, since different providers of statutory and private pensions share pension data in a standardised manner so that it can be aggregated so as to provide consumers with relevant information for adopting informed decisions about their retirement planning.

9 EIOPA considers that it is increasingly important to provide consumers with adequate information to make informed decisions about their retirement planning, as it is reflected in EIOPA s technical advice to the European Commission on best practices for the development of Pension Tracking EIOPA remains ready to further assist on this area, as relevant. TRANSITIONING TOWARDS A SUSTAINABLE economy WITH THE HELP OF DATA AND TECHNOLOGY Technologies such as AI, Blockchain, or the Internet of Things can assist European insurance undertakings and pension schemes in the implementation of more sustainable business models and investments. For example, greater insights provided by new datasets ( satellite images or images taken by drones) combined with more granular AI systems may allow to better assess climate change-related risks and provide advanced insurance coverage. Indeed, as highlighted by the Commission s Strategy on adaptation to climate change, actions aimed to adapt to climate change should be informed by more and better data on climate-related risks and losses accessible to everyone as well as relevant risks assessment tools.

10 8 EIOPA, Technical advice on the development of pension tracking systems, December 2021, Digital Transformation Strategy Promoting sound progress for the benefit of the European Union economy , its citizens and businesses Page 7/21 This would allow insurance undertakings to contribute to a wider inclusion by incentivising customers to mitigate risks via policies whose pricing and contractual terms are based on effective measurements, with the use of telematics-based solutions in home insurance. However, there are also concerns about the impact on the affordability and availability of insurance for certain consumers ( consumers living in areas highly exposed to flooding) as well as regarding the environmental impact of some technologies, notably concerning the energy consumption of certain data centres and crypto-assets. PREPARING FOR AN INCREASE OF ARTIFICIAL INTELLIGENCE WHILE FOCUSING ON FINANCIAL INCLUSION TOWARDS AN ETHICAL AND TRUSWORTHY ARTIFICIAL INTELLIGENCE IN THE EUROPEAN INSURANCE SECTOR The take-up of AI in all the areas of the insurance value chain raises specific opportunities and challenges; the variety of use cases is fast moving, while the technical, ethical and supervisory issues thrown up in ensuring appropriate governance, oversight, and transparency are wide ranging.